Economic Integration Through Financial and Factor Mobility

Abstract

Capital mobility impedes the ability of authorities to pursue independent policy goals. Market participants will drive the informal adoption of the most adaptive currency. The current paper is descriptive, predictive, and prescriptive. A Granger-Sims causality test shows the dependency of Japanese and European Union area interest rates on US interest rates. This econometrically illustrates the nature of the interdependency between monetary policies of studied countries. The potential gains from further integration, and further policy coordination, is a better allocation of the world’s savings and more effective risk-sharing among countries. Implicit in all of this is the need for further international arrangements on monetary and fiscal policies to avoid the trap of international policy competition where resources are allocated on the basis of privilege instead of efficiency. Real unity is dependent on policies that remove barriers to labor and factor mobility and fosters international cooperation.